From the Tax Law Offices of David W. Klasing - Schwarzbaum Case's Illustrates FBAR Willful Penalties and How FBAR Willful Penalties Are Calculated

IRVINE, Calif., April 14, 2023 /PRNewswire/ -- U.S. citizens who hold foreign bank accounts valuing more than $10,000 on any day of the year are required to report file a Report of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Network (FinCEN). Those who commit willful violations on their FBAR forms may face fines calculated by the Internal Revenue Service (IRS). In some cases, account holders seek to challenge the IRS's calculation of these fines.

However, if you are facing a penalty for a willful FBAR violation, then the IRS calculation is likely to be upheld by the court. This is evidenced by the 11th Circuit's decision in U.S. vs. Schwarzbaum. In Schwarzbaum, the court determined that courts cannot take over the role of the IRS when calculating penalties for FBAR violations.

It is best to avoid putting yourself in a position where you may be charged with an FBAR violation. If you have concerns regarding FBAR reporting for your foreign bank accounts, our lawyers can help. Get in touch with our experienced Dual-Licensed International Tax Lawyers & CPAs by calling the Tax Law Offices of David W. Klasing at (800) 681-1295 for a case review.

Summary of U.S. v. Schwarzbaum

The 11th Circuit case of U.S. v. Schwarzbaum deals with how the Internal Revenue Service (IRS) calculates willful penalties. Schwarzbaum was a naturalized U.S. citizen who held foreign bank accounts in Costa Rica and Switzerland. Between 2006 and 2009, the foreign bank account holder failed to satisfy FBAR reporting requirements on multiple occasions. In 2011, Schwarzbaum voluntarily disclosed information to the IRS pertaining to the existence and balance of his foreign bank accounts that he did not properly report. Accordingly, the IRS concluded that he should be liable for willful FBAR penalties. The government then initiated a lawsuit against Schwarzbaum in federal court.

The district court in this case found that the foreign bank account holder, Schwarzbaum, did commit a willful FBAR violation by signing a federal tax return while failing to file an FBAR. In regard to penalties, the district court held that the IRS had miscalculated the willful penalties. Accordingly, the district court re-calculated and imposed new penalties.

Upon review, the 11th Circuit affirmed that Schwarzbaum's violation was willful. However, the appellate court also determined that the district court does not have the power to calculate its own penalty for an FBAR violation. The 11th Circuit reasoned that the court's preparation of their own FBAR penalty calculation violated 5 U.S.C. § 706(2)(A) because the court unlawfully exercised an abuse of discretion. The court cannot take over the role of the IRS as it pertains to FBAR penalty calculation.

What Leads to a Willful FBAR Penalty?

A willful FBAR penalty is a fine that the IRS can impose if they determine that a tax payer was willful in failing to meet their FBAR obligations. When proving whether an FBAR violation was willful, the government does not need to prove intent. Tax payers can commit willful violations through reckless disregard of their obligations.

Furthermore, actual knowledge of an FBAR violation is also not required to constitute a willful error. Willful penalties can be administered when foreign bank account holders are willfully blind to their violations. Simply put, a willful penalty can also apply when the tax payer did not actually know of the violation at the time it happened.

There is no clear test to determine whether an FBAR violation was willful. It is most beneficial to tax payers to avoid such violations all together. If you are concerned whether you have complied with FBAR requirements pertaining to your foreign bank account, then you should contact our lawyers right away. Our experienced Dual-Licensed Tax Lawyers & CPAs can help review your case and determine the best course of action.

Calculating Willful FBAR Penalties

Willful FBAR penalties can be severe. If you were found to have committed a willful FBAR violation, then you may face penalties reaching upwards of 50% of your maximum account value per year. If you are facing a willful FBAR penalty, then you should contact our Dual-Licensed Tax Lawyers & CPAs for help determining whether the penalties were appropriately calculated.

Are There Lower Penalties for Non-Willful FBAR Violations?

There is no certain definition of what constitutes a non-willful FBAR violation. Courts will need to review the totality of the circumstances on a case by case basis when determining whether violations were willful. Unfortunately, the IRS has contributed to making this analysis even more difficult and ambiguous because the word "violation" can accompany several different meanings and outcomes.

Still, the penalties assigned for non-willful violations are less severe than willful penalties. Typically, penalties start at $10,000 per non-willful violation. Additionally, IRS agents do not have discretion to minimize or reduce FBAR penalties.

What to Do if You Were Assigned an FBAR Penalty

It is important to act quickly if the IRS has assigned you an FBAR penalty. The sooner you get in touch with our experienced international tax attorneys, the more efficiently we can act when fighting to have your penalties minimized or removed.

The U.S. government usually has two years to file a lawsuit enforcing an FBAR penalty. Unfortunately, since the FBAR form is not a tax form, Tax Court is not an available option for litigating the penalty. Rather, foreign bank account holders will have to fight the U.S. government in district court or in the U.S. Court of Federal Claims.

If you have to challenge an FBAR penalty in court, our attorneys can offer guidance and support throughout each step of the legal process. Still, it is best to avoid encountering any issues altogether. In Schwarzbaum, the foreign bank account holder got into trouble because he relied on his accountant's word that he had complied with FBAR reporting requirements. If you are concerned with FBAR reporting requirements as they pertain to your foreign bank account, then you should contact our attorneys right away. If possible, our team will try resolve any issues you may have before your case goes to court.

If You Need Help with FBAR Filings, Our Lawyers Can Help

If you have concerns regarding FBAR reporting for your foreign bank accounts, especially where you have not reported taxable offshore income or failed to file other offshore foreign information reports, seek support from our experienced Dual-Licensed Tax Lawyers & CPAs by calling the Tax Law Offices of David W. Klasing at (800) 681-1295 for a review of your case.

Note: 

As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply. 

It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process.  Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law  (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth.   See our Testimonials to see what our clients have to say about us!

If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.

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Public Contact: Dave Klasing Esq. M.S.-Tax CPA, [email protected]

SOURCE Tax Law Offices of David W. Klasing, PC